Japanese economy contracts in second quarter amid weak domestic and external demand

Newly produced cars and trucks are seen at an industrial port before they are loaded to a cargo ship in Yokohama, south of Tokyo 17 May 2012Reuters

Japan's gross domestic product (GDP) shrank in the second quarter amid weak exports and sluggish consumer spending, in a major setback for the economic reforms dubbed 'Abenomics' brought by Prime Minister Shinzo Abe.

The economic growth declined at an annualised pace of 1.6% in the second quarter, compared to market forecast of a 1.9% fall.

Leading to the contraction, private consumption that contributes about 60% of the GDP declined 0.8% in the April to June period from the previous year quarter. It was the first decline in consumer spending since the second quarter of 2014, when the country increased sales tax, prompting consumers to stay from buying.

The consumers spent less as wage increases have failed to match with the higher prices of goods and services after Japan increased sales tax rate to 8% from 5% in April 2014, according to economists.

Meanwhile, a decline in exports primarily due to lower demand from Asia and the US shaved 0.3 percentage off from second-quarter GDP.

The Bank of Japan and the Abe administration have undertaken a number of measures to shore up the Japanese economy, which has been suffering from deflation that lasted for more than a decade. While the measures have made some positive impacts, the current economic data show that a sustainable recovery in the economy is still intangible.

Japan is expected to announce another stimulus package at the end of 2015, given the weak second quarter. Economists expect the economy to pick up in the third quarter, as wage increases in the country would fuel more consumption and better growth in the US would lead to higher exports.